MNB Issues Recommendation on Climate and Environmental Risks
MNB published the Recommendation No 47/2021. (IV. 14.) on climate and environmental risks for credit institutions. The Recommendation sets out the MNB expectations in relation to the identification, measurement, management, control, and disclosure of climate and environmental risks as well as to the integration of environmental sustainability considerations into the business activities of credit institutions. MNB expects credit institutions to mostly apply this Recommendation from June 01, 2021, with certain sections of the Recommendation becoming applicable from June 30, 2021.
The following are the key highlights of the expectations set out in the Recommendation:
- Supervisory expectations for integrating environmental sustainability considerations into business model and strategy. MNB expects credit institutions to identify the risks arising from climate change and environmental degradation at the level of key sectors, geographical areas, and in relation to the products and services in which they operate or plan to operate. MNB also expects credit institutions to identify and assess which climate and environmental risks are material to their business strategy in the short, medium, and long term, along with the resilience of their business strategy to these risks.
- Supervisory expectations for internal governance. MNB expects the management body of the credit institutions to have adequate collective knowledge, skills, and experience with regard to the climate and environmental risks. MNB also expects that a separate organizational unit or function ("Environmental, Social, and Governance or ESG center” or dedicated “chief sustainability officer”) responsible for the management and control of climate change and environmental risks is established within the credit institution or a senior manager is designated under the management body in its supervisory function, responsible for the management and control of climate and environmental risks.
- Supervisory expectations for risk management. MNB expects credit institutions to have a comprehensive and well-documented picture of the impact of climate and environmental risks on existing risk categories. Credit institutions are expected to develop appropriate risk indicators and set appropriate limits for climate and environmental risks. Credit institutions are also expected to monitor and disclose, where available, their policies for economic (sub)sectors, geographical exposures, and the current data on climate and environmental risk exposures, preferably in the form of quantitative measures. MNB has also set out its expectations with respect to management of credit, market, operational, and liquidity risks as well as expectations regarding the assessment of climate and environmental risks through the use of sensitivity, scenario analysis, or stress testing.
- Supervisory expectations for disclosures. MNB expects credit institutions to start preparing for the new disclosure requirements under Article 8 of the Taxonomy Regulation and Article 449a of the Capital Requirements Regulation or CRR. Under Article 8 of the Taxonomy Regulation, companies and financial institutions subject to the non-financial reporting directive will be required, from January 01, 2022, to provide additional transparency on the extent to which their activities are considered environmentally sustainable. In addition, Article 449a of CRR requires large institutions with securities traded on a regulated market to disclose information on certain ESG risks after June 28, 2022.
MNB expects credit institutions to conduct self-assessment, including a detailed gap analysis, in relation to the requirements detailed in this Recommendation. Based on the findings, the institutions are expected to develop an action plan to address the gaps and to submit this plan to MNB by September 30, 2021. Following an analysis of the submitted gap analysis, action plans, and prudential discussions, MNB will, after considering the EU legislative developments, set more detailed deadlines for the latest dates of compliance for the different expectations, which will be published in the context of the next revision of this Recommendation. MNB has also made available a “Knowledge Base” to help banks to comply with the supervisory Recommendation as soon as possible and to the greatest extent possible by presenting a collection of practical examples, good practices, available data sources, and methodologies.
Effective Date: June 01, 2021/June 30, 2021
Keywords: Europe, Hungary, Banking, Climate Change Risk, ESG, Sustainable Finance, Credit Risk, Market Risk, Operational Risk, Stress Testing, Disclosures, NFRD, Taxonomy Regulation, CRR, Recommendation, Recommendation 42/2021, Reporting, MNB
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Senior practitioner in asset and liability management (ALM) and liquidity risk who assists banking clients in advancing their treasury and balance sheet management objectives
Previous ArticleEC Issues Disclosure Standards and Corrigendum on NSFR Reporting
ECB Finds Banks Unprepared for Pillar 3 Climate Risk Disclosures
The European Central Bank (ECB) published results of the 2022 supervisory assessment of climate-related and environmental risk disclosures among significant institutions (103) and a selected number of less significant institutions (28).
NCUA Assesses Credit Union Exposure to Climate-Related Physical Risks
The National Credit Union Administration (NCUA) released a Research Note that examines the exposure of credit unions to climate-related physical risks. In a related development
EBA Issues Multiple Regulatory and Reporting Updates for Banks
The European Banking Authority (EBA) is seeking comments, until July 31, 2023, on the draft Guidelines on the proposed common approach to the resubmission of historical data under the EBA reporting framework.
EC Adopts Regulation on Own Funds, Issues Other Updates
The European Commission adopted Delegated Regulations on own funds and eligible liabilities, on requirements for the internal methodology under the internal default risk model
CDP Platform to Report Plastic-Related Impact, Issues Other Updates
The Carbon Disclosure Project (CDP) announced that its global environmental disclosure platform has enabled reporting on plastic-related impact for nearly 7,000 companies worldwide
IASB to Enhance Reporting of Climate Risks, Proposes IFRS 9 Amendments
The International Accounting Standards Board (IASB) updated its work plan to enhance the reporting of climate-related risks in the financial statements,
BIS Addresses Data Gaps and Macro-Prudential Policy for Climate Risks
The Financial Stability Institute (FSI) of the Bank for International Settlements (BIS) published a brief paper that examines challenges associated with the use of macro-prudential policies to address climate-related financial risks.
FCA Sets Out Business Plan, Launches TechSprint on Greenwashing
The Financial Conduct Authority (FCA) published its business plan for 2023-24. The plan sets out details of the work planned for the next 12 months to achieve better outcomes for consumers and markets
UK Committee Sets Out Recommendations for Next Phase of Open Banking
The Joint Regulatory Oversight Committee (JROC), comprising the Financial Conduct Authority (FCA) and the Payment Systems Regulator (PSR) as co-chairs and the HM Treasury and the Competition and Markets Authority (CMA) as members
ECB Publishes Multiple Regulatory Updates for Banking Institutions
The European Central Bank (ECB) published the results of the 2022 climate risk stress test of the Eurosystem balance sheet,